Bank Nifty dividend yield points to need for caution

ET Intelligence Group: The Bank Nifty's dividend yield has reached 0.7 - the level last seen in 2008. When the dividend yield drops below one, it is usually considered as an early indicator that the stock or index valuation may be running ahead of fundamentals. The chart of dividend yield of the Bank Nifty shows a double bottom, which reflects hurdles ahead for the sector index.

“The low dividend yield shows that alarm bells have started ringing and cream of the current momentum seems to be over. With low profitability of the state-owned banks in the previous fiscal, the safety net for investors is shrinking. Hence, caution is warranted," said Nilesh Dedhia, director at NTD Trading.

The Bank Nifty has outperformed the Nifty index by 14% and 3% in the past three months and last one year periods, respectively. State-owned lenders such as Punjab National Bank, Bank of India and Canara Bank surged more than 20% in the past three months.

The surge in the Bank Nifty has skewed the historical ratio of price-spread with the Nifty. The ratio reached 1.19 compared with five-year average of 1.04. It depicts a premium of 14% from the long-term average. The current reading is just 1.5% away from the two standard deviations relative to the mean value. This increases the probability of a drop in the value back to the mean, statistically known as a mean revert.